Financial Shenanigans: A Holistic Approach to Detecting Financial Shenanigans

What to look for when reviewing financial statements and searching for financial shenanigans. 

 A Holistic Approach to Detecting Financial Shenanigans 

Just as the three branches of government rein in bad behavior by government officials, the three financial statements help to protect investors from misbehaving corporate executives. 

• Specifically, investors can sniff out Earnings Manipulation Shenanigans by scrutinizing the Balance Sheet and the Statement of Cash Flows. 
• Similarly, they can detect signs of misleading operating cash flow by finding unusual or troubling changes on the Statement of Income and the Balance Sheet. 
• Additionally, investors can use the supplementary disclosures and key metrics provided by management as another form of “checks and balances.”

Examples

Company 

Financial Shenanigan 

Warnings on Other Financial Statements 

Earnings Manipulation Shenanigans 

WorldCom 

Boosted income by capitalizing operating costs 

SCF: Capital expenditures surged 

Transaction Systems Architects 

Recorded revenue too soon 

BS: Rapid increase in long-term and unbilled receivables 

IBM 

Boosted income with one-time gain 

SCF: Gain on investment sale in Operating section 

AOL 

Boosted income by capitalizing operating costs 

BS: Deferred marketing costs exploded 

Cash Flow Shenanigans 

Tyco 

Inflated CFFO using acquisitions 

BS: Receivables increase differs on BS and SCF 

Home Depot 

Boosted CFFO with unsustainable gain 

BS: Accounts payable surged 

Sun Microsystems 

Boosted CFFO with unsustainable gain 

IS: One-time litigationrelated gain